Diageo expects Coles to catch Woolworths in liquor retail market

Simon Evans

The managing director of Diageo Australia, which sells brands including Johnnie Walker, Smirnoff and Bundaberg Rum, believes Coles will eventually be able to reinvigorate its liquor retail business to be a much more forceful competitor against rival Woolworths.

Tim Salt, who runs the No.1 company in spirits in Australia, says while Woolworths is currently the standout performer when it comes to liquor retailing, he expects Coles will be able to catch up in a similar way to its dramatic improvement in supermarkets.

"I wouldn't back against them, given what they've done in supermarkets," Mr Salt says.

Coles has out-performed Woolworths in supermarkets for a record 21 consecutive quarters, but in liquor retailing is a long way behind, as Woolworths powers ahead led by its flagship Dan Murphy's superstore chain.

The underperformance of the Coles liquor business has been a source of frustration for Coles' owner Wesfarmers for several years, considering the supermarkets business has made such strong advances since Coles Group was acquired in a $19 billion takeover in 2007.

Diageo Australia generates about 75 per cent of its total sales to liquor retailers, most of it to both Woolworths and Coles. The rest goes to bars, pubs and other licensed venues.

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Mr Salt says if Coles and other rivals to Woolworths such as the smaller independent chains also improved their performance it would be a plus for suppliers across the board.

"It raises the game," he says.

He says Diageo has found the going tough in Australia over the past year, with consumer confidence still soft and volumes lower, even though there is a trend of "trading up", where drinkers buy more premium brands. But that isn't enough to offset the lower volumes.

"People are drinking less but they are drinking better."

He says Diageo Australia's sales revenue was down by 2 per cent in 2013-14 from the previous year's figure of $542 million. Net profit after tax was also marginally lower than the 2012-13 figure of $43 million.

Consumers are still cautious.

"We're not seeing a pick-up."

The widely-held view that spirits is a category which is immune from economic softness, is just not right.

"The answer is, it's not true," Mr Salt says.

The company's ready-to-drink alcohol brands in pre-mixed spirits are suffering from an onerous taxation regime which is hurting growth. "You're seeing continued erosion of the RTD segment."

The first few months of trading in 2014-15 across the Diageo Australia business had been patchy and Mr Salt says it is too difficult to make a profit forecast for the full year.

"It's holding. We are where we want to be," he says.

Diageo Australia is preparing to launch a new product called Smirnoff frozen cocktail pouches this month, which is a 250ml soft pack selling for $5 each in a pack of three.

The company is also gearing up for a traditional spike in sales over the next few weeks through Christmas gift packs of prestige spirits containing extra promotional specials such as two glasses.

Mr Salt says Diageo Australia, which is part of the global Diageo Plc conglomerate headquartered in Britain, won't be altering its tactics in the pre-Christmas lead-up because of a change in strategy by Australia's largest wine group, Treasury Wine Estates.

Treasury, led by chief executive Mike Clarke, has aggressively overhauled its own approach by switching the release of its flagship Penfolds Grange to mid-October each year, ditching three decades of the previous timing of May 1. Mr Clarke's rationale is in part built upon the premise that Grange and other high-end Penfolds red wines will capture a large share of the pre-Christmas luxury goods gift-giving market.

Mr Salt says Grange is a "wonderful product" but is a small, niche player and Diageo will be focusing on its own business.